BOMBAY STOCK EXCHANGE LTD,MUMBAI vs. ADDL CIT RG 2(1), MUMBAI

Bombay Stock Exchange Ltd. 2 2. Grounds no.1 and 2 raised by the assessee relate to disallowance of expenditure amounting to ` 7,33,98,128, under section 14A of the Income Tax Act, 1961 (for short "the Act") r/w rule 8D of the I.T. Rules, 1962

Briefly the facts relating to this issue are, the assessee, which existed as association of persons (AOP) for past 131 years, was incorporated as a company on 8th October 2005, under the Bombay Stock Exchange (Corporation) Demutualization Scheme 2005, notified by Security Exchange Board of India (SEBI) on 20th May 2005. For the assessment year under consideration, the assessee filed its return of income on 29th November 2006, declaring total income of ` 58,21,09,698. During the assessment proceedings, the Assessing Officer noticed that the assessee has earned the amount of ` 16,39,37,389, by way of dividend which was claimed as exempt from payment of tax. He noticed that the assessee’s investment in securities, mutual funds, Government securities, etc., stands at ` 2117.33 crore. The dividend received from investment during the previous year are as under:– Long term investments ` 30,20,000 Current investments ` 15,08,33,086 Mutual funds ` 60,23,312 Bombay Stock Exchange Ltd. 3 ` 10,65,728 Mutual funds (Govt. securities) Mutual funds (Brokers fund) ` 11,95,263 Total ` 16,39,37,389 He further noticed, apart from other expenses like salary and indirect expenses, the assessee has also incurred interest expenditure of ` 2,62,158. It was stated by assessee, these expenses have been incurred for earning both taxable and exempt income. It was further submitted, the expenditure incurred could not be specifically related either to the taxable income or the exempt income. The Assessing Officer, however, sought to apply the provisions of section 14A of the Act for disallowing expenditure relating to exempt income. In response to the query raised by the Assessing Officer, as stated by the Assessing Officer, the assessee submitted a working quantifying the disallowance under section 14A at ` 15,95,064, vide letter dated 21st January 2008. Working of the disallowance by the assessee under section 14A, is as under:– “Direct Expenses: Salary of staff ` 6,11,913 Interest on Bank overdraft ` 2,62,158 Indirect Expenses: Total expenditure as per Profit & Loss account ` 63,78,70,989 Less: Direct expenses Salary to staff ` 6,11,913 Interest on Bank overdraft ` 2,62,158 Bombay Stock Exchange Ltd. 4 Balance ` 63,69,96,927 Basis of allocation Total area occupied by company (sq.ft.) ` 88,350 Total area occupied by Treasure Section Invt. & A/c Dept (sq.ft.) ` 100 Indirect expenses allocated to Treasury section (` 636996927 x 100/88350) ` 7,20,993 Total amount inadmissible u/s 14A ` 15,95,064”

The Assessing Officer, after examining the disallowance worked out by the assessee, was of the view that the basis of calculation of disallowance by the assessee is not in terms of the provisions of section 14A r/w rule 8D. He further opined that the method adopted by the assessee to work out the indirect expenses by considering the total area occupied by the treasury section has no basis. The Assessing Officer observed, though, the assessee was having available with it sufficient reserve and surplus, but, still it has availed secured and unsecured loans for business purpose. From these facts, he inferred that the assessee must have used his own funds as well as borrowed funds for making investment, therefore, provisions of section 14A are attracted. Relying upon a Special Bench decision of the Tribunal, Mumbai Bench, in ITO v/s Daga Capital Management Pvt. Ltd. & Ors., [2008] 119 TTJ (Mum.) 289 (SB), wherein it is held that provisions of sub–section (2) and (3) to section 14A r/w rule 8D are applicable Bombay Stock Exchange Ltd. 5 retrospectively, the Assessing Officer proceeded to compute the disallowance under section 14A, by applying rule 8D. Though, the Assessing Officer accepted the direct expenditure relating to staff salary and interest as shown by the assessee, but, as far as indirect expenses are concerned, the Assessing Officer rejecting disallowance worked out by the assessee, applied rule 8D(2)(iii) and disallowed 0.5% of average investments which worked out to ` 7,25,24,057. Thus, the total disallowance made by the Assessing Officer under section 14A r/w rule 8D was to the tune of ` 7,33,98,128. Being aggrieved of such disallowance the assessee challenged the same in an appeal preferred before the learned Commissioner (Appeals).

Before the first appellate authority, the assessee while challenging the disallowance made by the Assessing Officer took a specific contention that rule 8D cannot be applied retrospectively by relying upon a decision of the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, (2010), 328 ITR 081 (Bom.). The learned Commissioner (Appeals), though agreed that rule 8D is not retrospective but he observed that as per the decision of the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) disallowance has to be made following a reasonable method. He observed that since the Assessing Officer has disallowed indirect Bombay Stock Exchange Ltd. 6 expenses by following the method provided under rule 8D(2)(iii), the same has to be considered to be a reasonable disallowance. While doing so, he observed, as method adopted by assessee for disallowing indirect expenses is not provided under the statute, it cannot be accepted.

The learned Counsel for the assessee, Shri Soli E. Dastur, submitted before us, the assumption of jurisdiction by the Assessing Officer for applying section 14A itself is invalid as he has not recorded his satisfaction on the correctness of assessee’s claim of expenditure in relation to exempt income having regard to the accounts of the assessee. The learned counsel referring to the provisions of section 14A sub–section (2) submitted, the Assessing Officer must record his satisfaction that the claim of assessee is not correct having regard to the accounts maintained by him. He also referred to rule 8D(2) of the rule to show that similar recording of satisfaction is also provided under the said provision. Referring to the impugned assessment order, the learned Counsel for the assessee submitted, nowhere the Assessing Officer has recorded any such satisfaction expressly stating that the claim of the assessee is not correct with reference to the accounts maintained by him and rule 8D is the only reasonable method. He, therefore, submitted that there being a failure on the part Bombay Stock Exchange Ltd. 7 of the Assessing Officer in recording satisfaction in terms with section 14A r/w rule 8D(2), assumption of jurisdiction for invoking section 14A is invalid. He submitted, though, learned Commissioner (Appeals) has observed that rule 8D is a reasonable method but he cannot substitute his view with that of the Assessing Officer. In this context, the learned Counsel for the assessee referred to certain decisions relating to grant of sanction under section 151 of the Act for issuance of notice under section 148 submitted if a particular act has to be done in the manner prescribed under the statute it has to be done in that manner only and cannot be done in any other way. Therefore, he submitted that when section 14A sub–section (2) has a mandatory requirement of recording of satisfaction by the Assessing Officer, any failure on the part of the Assessing Officer to do so would result in invalid application of the said provision. In this context, he referred to the decision of the Hon'ble Delhi High Court in Maxopp Investment Ltd. v/s CIT, [2012] 347 ITR 272 (Del.) The learned Counsel for the assessee submitted when rule 8D is not applicable retrospectively and will apply from the assessment year 2008–09, the Assessing Officer could not have made disallowance as per the provisions of said rule and the learned Commissioner (Appeals) also could not have upheld the decision of the Assessing Officer. He submitted, the view expressed by the Tribunal, Special Bench, in Daga Capital Management Pvt. Ltd. (supra), is no more good Bombay Stock Exchange Ltd. 8 law in view of the decision of Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra), and Hon'ble Delhi High Court in Maxopp Investment Ltd. (supra), wherein it is held that rule 8D would apply prospectively, from assessment year 2008–09. The learned counsel submitted, the disallowance worked out by the assessee under section 14A, cannot be considered to be unreasonable as the Assessing Officer has accepted the direct expenditure worked out by the assessee on the basis of salary paid to staff of investment / treasury department, therefore, the indirect expenses also should be restricted to the area occupied by the investment / treasury department. He submitted, the aforesaid basis adopted by the assessee cannot also be considered to be unreasonable as the Tribunal has approved such method. In this context, he relied upon the decision of the Tribunal, Mumbai Bench, in Voltas Ltd. v/s ACIT, ITA no.198/Mum./2012 dated 15th May 2013. The learned Counsel submitted, assessee has adopted the aforesaid method in respect of all expenses relating to exempt as well as taxable income, hence, the Assessing Officer, while accepting such method in case of other expenditures cannot reject it for indirect expenses. The learned Counsel for the assessee submitted, the assessee has not incurred any other indirect expenses for making investment except expenditure relating to the area allocated to finance department. In this context, Bombay Stock Exchange Ltd. 9 the assessee submitted before us a chart showing the details of expenses allocated to the finance / treasury department. The learned Counsel submitted, the disallowance made by the assessee under section 14A r/w rule 8D being most reasonable in terms with the principle laid down by the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra), needs to be accepted.

The learned Departmental Representative, Shri Samir Tekriwal, raising a preliminary objection submitted before us, the assessee did not challenge the assumption of jurisdiction under section 14A either before the Assessing Officer or before the learned Commissioner (Appeals). He submitted even the assessee has not raised a specific ground on the issue before the Tribunal. Therefore, he cannot raise such jurisdictional issue at this stage. The learned Departmental Representative submitted, moreover, the assessee itself has disallowed expenditure under section 14A, therefore, he cannot challenge the application of section 14A by the Assessing Officer. The learned Departmental Representative referring to the discussion made by the Assessing Officer in Para–5.2 of the order submitted, the Assessing Officer has recorded his satisfaction regarding the correctness of assessee’s claim while rejecting the disallowance worked out by the assessee. Therefore, it cannot be said that the